Covid 19 coronavirus: Brian Fallow: Pandemic savages tourism income

OPINION:

Ironically perhaps, these days of peril and pestilence have brought New Zealand the closest it has been for 19 years to paying its way in its dealings with the rest of the world.

The disruptions to trade and tourism saw the balance of payments on goods flip last year from deficit to surplus, even as the surplus on services withered.

For the whole of 2020 the current account deficit — the gap between what the country spends and what it earns internationally — was $2.5 billion, or 0.8 per cent of gross domestic product. It was the smallest that ratio has been since 2002 and compares with an average of 3 per cent of GDP over the previous seven years.

That was despite the carnage to international tourism wrought by the closed border in an economy in which — the OECD reckons — tourism accounts for 15 per cent of GDP, the fifth largest share among the 44 countries it tracks.

Last year the balance on services shrank to a surplus of just under $1b, from $2.7b in 2019.

Typically, over the past 20 years New Zealand has earned more from selling services overseas — for instance spending by international visitors on flights and hotels — than it spent on buying services from overseas, Statistics NZ said.

But in the December 2020 quarter services exports at $3.8b were only half their level a year earlier, almost all of which is attributable to a drop in travel and transport services. And that preceded the normal seasonal peak in tourism, which is the March quarter.

It was partially offset by a decline of $2b in imports of transport and travel services as Kiwis stayed in the country.

Services trade is not all about tourism and travel, however. Exports of intangibles like information communications technology services and charges for the use of intellectual property have been steadily increasing.

The balance on goods, by contrast, is normally in the red, with imports exceeding exports.

Not this time. In the December quarter, exports of goods were down $600 million or 3.7 per cent on a year earlier, but imports were down $1.8b or 10.3 per cent.

For 2020 as a whole, the balance on goods flipped to a surplus of $3.3b from 2019’s $3.7b deficit. It was a year of two halves, though. The recession in the first half of the year saw imports of crude oil and cars in particular fall sharply as Covid travel restrictions bit, but imports of both have since partially risen towards pre-Covid levels, Statistics NZ said.

The third component of the current account, the income balance, is the one which consistently drags the whole thing deep into the red. It is essentially the cost of servicing — through interest payments and profits — the stock of foreign claims on the economy which have accumulated as a result of decades of external deficits.

The income balance was a deficit of $6.9b for 2020 as a whole, down from $9.5b in 2019. In this context, a period of low global interest rates helps when the stock of net international liabilities stands at $177b, the lion’s share of which ($149b) is debt.

Stepping back from the peculiarities of the latest data, the balance of payments deserves more attention than it gets.

It may not be an acute problem but it is a chronic one.

That is because economists can show with a bit of algebra that the current account balance must equal the difference between investment and saving in the economy.

“Investment” in this context means adding to the economy’s capital stock; it is not about financial transactions. It is investment as opposed to consumption.

So building a house is investment; buying an existing one to rent out is not. Equipping a factory is business investment; buying shares isn’t.

New Zealand does way too little investment. The starkest evidence of that right now is the housing crisis, evidence that residential investment has fallen painfully short of what was needed to accommodate population growth.

At the same time, the business sector is “capital shallow”, with too little capital invested per worker, stunting productivity and incomes.

And the evidence of insufficient investment by central and local government in infrastructure is not hard to discern.

Inadequate as the investment is, it still outstrips our willingness to fund it from our own savings, resulting in the endless string of current account deficits which need to be financed by running up debt to, or selling off assets to, the rest of the world.

The cumulative effect is a level of net external liabilities equivalent to 55 per cent of GDP, unchanged from September.

It has been trending down from a peak of 80 per cent during the global financial crisis but it is still too high for comfort.

A key reason the Covid recession has not seen the external debt level climb is the way the Government’s deficit has been financed.

As Statistics NZ puts it, “Following the GFC and Canterbury earthquakes the Government issued debt securities to finance deficits. These debt securities were sold on the open market, including to foreign investors.

“As a result the New Zealand Government’s overseas debt rose significantly from under $20b in 2008 to over $50b in 2013.”

The difference this time is a big new buyer in the bond market — the Reserve Bank.

It has been buying government stock about as fast as the Treasury has been issuing it, keeping the debt increase onshore.

It does this, it insists, to lower retail interest rates and not to be obliging to the Minister of Finance. It is still looking hopefully for signs that low rates will prevail over uncertainty and see business investment pick up.

But there was no sign of that in yesterday’s GDP numbers.

Business investment in the December quarter was down 3.1 per cent on September and down 7.7 per cent on December 2019.

And the Reserve Bank will not wait indefinitely.

It is wary of crowding out private sector investors, domestic or foreign, from the bond market, so it has a self-imposed cap of holding no more than 60 per cent of the government debt on issue. That probably leaves it with about another $30b to spend.

Meanwhile, rising global bond yields are steepening the yield curve.

So for the income balance, as for goods and services, we may well have seen the best of this cycle.

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